FPI Investment in Debt instruments by REITs and InvITs

With the objective to augment further funding for the infrastructure and real estate sectors, the Finance Ministry in its statement dated Feb 11, 2021 (“FinMin Statement”)[1], stated that it would be introducing relevant amendments to the Securities Contracts (Regulation) Act, 1956 (“SCRA”), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“Recovery of Debts Act”), to enable Infrastructure Investment Trusts (“InvITs”) and Real Estate Investment Trusts (“REITs”) to easily avail debt financing from investors including Foreign Portfolio Investors (“FPIs”). While the intent is clear, the question is FPI investment has now been enabled in debt securities issued by REITs and InvITs.

I.  Latest Amendments and their benefits

The securities regulator of India, Securities and Exchange Board of India (“SEBI”), had some time ago permitted listed InvITs and listed REITs[2], to issue listed debt securities. The definitions of ‘debt securities’ and ‘securities’ however, across various legislation still required amendment to include debentures issued by trusts within their purview and this has now been addressed by the latest amendments. The following are some of the key changes that have just been brought in.

· Pooled Investment Vehicles may issue debt securities – The Finance Act, 2021 has brought in amendments (amongst others) to the SCRA, introducing new Section 30B to the SCRA which specifically provides that a pooled investment vehicle[3] registered with SEBI (which will include REITs and InvITs), may borrow funds and issue debt securities as may be permitted under the relevant SEBI regulations.

· Definition of ‘Securities’ widened – This above amendment under the leads us to the definition of ‘securities’ under the SCRA, which earlier provided no clarity on whether debentures issued by InvITs or REITs (although permitted by SEBI) would also be covered within the meaning of the term ‘securities’. The definition as amended[4] now specifically includes within its purview, debentures / bonds issued by a pooled investment vehicle registered with SEBI (such as an InvIT or REIT), whether constituted as a trust or otherwise, thereby recognizing debentures or bonds issued by a SEBI registered InvIT / REIT in India as a ‘security’ under the SCRA. This results in several other statutes and regulations that rely on the definition of ‘securities’ under the SCRA to widen the scope of ‘securities’ to debentures or bonds issued by SEBI registered InvITs / REITs.

· Clarification that such trusts can provide security for debt availed – The new Section 30B clarifies that a pooled investment vehicle may provide security interest to its lenders / debenture holders subject to provisions of its trust deed and its lenders may recover defaulted amounts and enforce their security interest against the assets of the pooled investment vehicle by initiating proceedings against the trustee acting on behalf of relevant pooled investment vehicle.

· More enforcement options for Domestic Lenders – Related amendments have also been made to the SARFAESI Act and the Recovery of Debts Act, extending the definition of ‘Borrower’ under these legislations to include a ‘pooled investment vehicle’, which when read with the definition of ‘Secured Creditor’ under the SARFAESI Act will enable a debenture trustee in respect of listed secured debt securities issued by an InvIT or REIT, to access the protections and avail the enforcement mechanism under the SARFAESI Act. Similarly, the benefit of the Recovery of Debts Act now also becomes available to eligible lenders in respect of debt securities issued by an InvIT or REIT as well.

· Insurers also now permitted to invest – Interestingly, reacting swiftly to the FinMin Statement, the insurance regulator, Insurance Regulatory and Development Authority of India also recently by its circular dated April 22, 2021, permitted insurers (subject to certain conditions specified in this circular) to invest in debt securities issued by InvITs and REITs.

II.  FPIs – Nearly there

From an FPI’s perspective, the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (“SEBI FPI Regulations”) permit FPI’s to invest in debentures issued by a body corporate and such debt securities as permitted by the RBI from time to time. The RBI, under the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (“Debt Instruments Regulations”) lists out the securities that an FPI may invest in on a repatriable basis and also issues various circulars thereunder (“RBI Circulars”) providing the limits and conditions for such investments. Currently the Debt Instruments Regulations only permit FPIs to invest in non-convertible debentures issued by companies. An amendment by the RBI to Schedule 1 of the Debt Instruments Regulations will therefore be required to permit FPIs to invest in debt securities issued by trusts such as REITS and InvITs. It would also be prudent to have a clarification from the RBI extending the corporate bond limits under the RBI Circulars to also include investments in debt securities issued by such trusts.

With foreign investors eager to invest in REITs and InvITs in India the aforesaid change once brought about by the RBI will go a long way to close the loop and clearly permit such FPI investment in debentures issued by REITs and InvITs in India.

This article is authored by Anand Shah, Senior Partner (anand.shah@azbpartners.com), Hufriz Wadia, Partner (hufriz.wadia@azbpartners.com) and Neeraj Nainani, Associate (neeraj.nainani@azbpartners.com). Please do not hesitate to reach out to any of the authors for clarifications.

Authors:

Anand Shah, Senior Partner
Hufriz Wadia, Partner
Neeraj Nainani, Associate

Footnotes:

[1] Titled “Amendments for enabling FPIs to subscribe to listed debt securities of REITs and InvITs”
[2] respectively under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 and Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014.
[3] “pooled investment vehicle” means a fund established in India in the form of a trust or otherwise, such as mutual fund, alternative investment fund, collective investment scheme or a business trust as defined in sub-section (13A) of section 2 of the Income-tax Act, 1961 and registered with the Securities and Exchange Board of India, or such other fund, which raises or collects monies from investors and invests such funds in accordance with such regulations as may be made by the Securities and Exchange Board of India in this behalf.
[4] The definition of ‘securities’ has been amended to include the highlighted text below

“(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or a pooled investment vehicle or other body corporate.….

(ida) units or any other instrument issued by any pooled investment vehicle;…

Date: May 10, 2021